130/30 Funds Explained
The 130/30 Fund is considered a Long-Short Equity Fund, meaning it goes both long and short at the same time. The "130" portion stands for 130% exposure to its long portfolio and the "30" portion stands for 30% exposure to its short portfolio.Quick primer for those who might need it: When you buy long, it means you are betting on stocks that you expect appreciate or go up in price (this is your typical investment). When you short stocks, it means you are betting on stocks you expect to decline (this is done by borrowing stocks now and buying them back later).
So going back to the 130/30 fund, the name implies that we have 130% of our invested dollars going towards long purchases and 30% towards shorting, which is exactly what the fund is doing. A fund company can do this by applying the short, borrowed money towards the long stake, essentially giving the long fund leverage, allowing the asset manager to invest $160 for every $100.
The math can be a bit confusing, but fund managers seem to love the 130/30 mix because it essentially provides shareholders 100% exposure to the market, but gives the manager an opportunity to achieve higher alpha through the leveraged long side and picking losers for the short side.
The 100% exposure to the market is key, because with some of the other long-short mixes, the investor might become frustrated with lower than S&P 500 returns, even if the risk was lower. Even under current regulations a fund could go all the way up to 150/50, but practitioners seem to favor the 130/30 because it seems to better from a risk/reward perspective (140 and 150 magnify the risk too much).
130/30 Funds Concerns
There are a few things to think about when considering a 130/30 fund. Here are my biggest concerns:
130/30 Is Just a Structure
The first thing to remember is that 130/30 is a structure, not a strategy. It is still up to the fund manager to pick the right stocks. It does give the fund manager more flexibility, but it also puts more pressure on the fund manager to choose the right stocks for the long and short portfolios. Shorting is a difficult game, so you are going to want an experienced fund manager with access to lots of quality research.
Expenses & Turnover
I expect these funds will have high turnover ratios and high expense ratios. This is something to consider, especially for taxable accounts, where investment turnover can eat away at returns. If you are interested in these funds, you might want to keep them in tax-deferred accounts.
Portfolio Fit
How do these funds fit into your portfolio? Probably not very well. They don't exactly help you with diversifying among asset classes. Another thing to keep in mind is that these are newer, untested funds. Sometimes it is better to ignore the "hot trends" and new fund types until they have a few years of history for you to study, especially considering how much the fund manager's picking abilities factor in.
Aside from these concerns, I'm glad to see the fund industry continuing to build out new types of funds and am looking forward to seeing how these funds do.
130/30 Funds Available
The number of 130/30 funds available is small, but expected to grow quickly. Below is a list of 130/30 funds currently available:- ING 130/30 Fundamental Research (IOTAX)
- Mainstay 130/30 Growth (MYGAX)
- Mainstay 130/30 Core (MYCTX)
- UBS U.S. Equity Alpha (BEAAX)
- Blackrock Large Cap Core Plus
- Dreyfus Premier 130/30 Large Cap Growth
- Mainstay 130/30 International
- SSgA Core Edge Equity
